One of the main Dutch pension funds, PGGM has decided to divest its holding in the Chinese operator PetroChina due to the fact that it is involved in human rights violations in Sudan.

At the time when China’s largest oil company, China National Petroleum Corporation (CNPC), is showing a substantial increase in assets, its listed daughter company PetroChina is confronted by an uphill battle. The growing uneasy of institutional investors and pension funds with the current strategy of oil companies in African oil producer Sudan has again resulted in a major setbacks for operators. One of the main Dutch pension funds, PGGM, currently holding assets of around 88 billion euros, has decided to divest its holding in the NYSE-listed Chinese operator PetroChina. According to the spokesman of PGGM, the Dutch pension fund has decided to end its investments due to the fact that the Chinese operator is involved in human rights violations in Sudan.

The unexpected move by PGGM is significant, as this is the first time ever that Dutch pension funds have decided to act against Chinese oil operators. The impact in the whole sector will be high, as Dutch pension funds belong to the top 10 in the world. With holdings of around $1 trillion in total, the Dutch pension funds are a force to be reckoned. For the oil and gas sector this is for sure the case, as funds such as PGGM, ABP, Railway Pension Fund and others have heavily invested their money in oil- and gas-related stocks, while alternatives such as oil futures, etc. have been the main profit-making instruments in the past years. The move of PGGM is expected to be followed by ABP, the third-largest pension fund in the world, behind CalPERS (California Public Employees' Retirement System) and the Norwegian oil fund.

Analysts also have been keeping an eye on European investors since U.S. president George W Bush signed the Sudan Divestment Law, in which American companies have been asked to remove all their investments with companies involved in Sudan. In the past years, the pressure has been mounting on largely American and European oil companies to end their operations in the civil war-stricken African operator - with some success.

However, most operators at present are European, such as Total. The move by the Dutch funds could also include the coming time that other (European) oil companies are being urged to move out of Sudan. If not, the same move as with PetroChina could be easily made. The impact of such a move will be large, as main shareholders of most companies are the institutional investors and/or pension funds. Possible targets could include Total, Marathon or even oilfield services giants such as Schlumberger.

The impact on PetroChina is still unclear, as its parent company CNPC is state-owned and totally backed up by Beijing. The fact that Chinese military advisors, connected to CNPC, are actively involved in the ongoing battle between Sudanese government forces and southern Sudanese or Darfur-based rebels, is still continuing shows that there is still a long way to go before also non-Western operators are able to be pressured to change. Still, it would be interesting to see the results of a European-American-wide boycott of Chinese operators with assets in Sudan. A total breakdown of shares on the stock exchange will also be felt in the still-hidden financial world of China.

The overall strategy of Chinese operators, such as CNPC, will on the short-run not be changed due to the voting and investment behaviour of its pension funds. CNPC has shown by its new asset valuation that its international strategy will continue. In its financial report, the Chinese giant reported that asset value has reached a total of 1.54 trillion yuan ($212.4 billion), an increase of 7.1% in comparison to 2006. Even though international assets have increased, no specific valuations of these have been given. The Chinese company also indicated that during 2007, sales of natural gas within China have increased by 21.3%. CNPC’s new production capacities in China of crude oil and natural gas have hit a level of 13.66 million tonnes and 10.3 billion cubic metres.

Even though no specifications have been given, international operations have been contributing to the company’s performance. International E&P projects and investments will be increased across the board in Africa, the Middle East, Central Asia, and other regions. CNPC has at present 69 projects in 26 different countries - but still its main international production and exploration asset is Sudan, counting for around 7% of total Chinese imports.

Some spin-offs of the Sudan divestment spree could have major repercussions elsewhere too. If pension funds are keeping to their strategic choice not to invest in companies violating human rights or working in dictatorial regions, most oil and gas companies will be hit. At the same time, it is not only oil and gas companies that are setting up shop in the likes of Sudan; mining and transportation sector companies are heavily involved too. When divestments in these pop up could be the main question at present.

By Sven Ridley-Wordich, ResourceInvestor.com (18 January, 2008)

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